Happiness Biotech Group (NASDAQ:HAPP) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Happiness Biotech Group (NASDAQ:HAPP), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Happiness Biotech Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = US$9.3m ÷ (US$94m - US$5.9m) (Based on the trailing twelve months to September 2020).

Thus, Happiness Biotech Group has an ROCE of 11%. In isolation, that's a pretty standard return but against the Personal Products industry average of 14%, it's not as good.

See our latest analysis for Happiness Biotech Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Happiness Biotech Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Happiness Biotech Group, check out these free graphs here.

So How Is Happiness Biotech Group's ROCE Trending?

On the surface, the trend of ROCE at Happiness Biotech Group doesn't inspire confidence. Over the last three years, returns on capital have decreased to 11% from 55% three years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Happiness Biotech Group has decreased its current liabilities to 6.3% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by Happiness Biotech Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 6 warning signs for Happiness Biotech Group (1 is concerning) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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